The Complete Step-by-Step Process for Executing a 1031 Exchange
If you have never executed a 1031 exchange before, the process can seem complex. But the mechanics, while requiring careful attention to timing and procedure, are straightforward when you understand each step. Here is an exact walkthrough of how a standard deferred 1031 exchange works in practice.
Step 1: Decide Before You Sell
The most important thing to understand about a 1031 exchange is that you must decide to execute one before you close on the sale of your relinquished property. You cannot decide to do a 1031 exchange after the sale has closed. The QI agreement must be in place before the transaction closes.
Step 2: Engage a Qualified Intermediary
Contact a Qualified Intermediary and sign an exchange agreement. Provide them with a copy of your purchase and sale agreement for the relinquished property. They will prepare the exchange documentation and be ready to receive the sale proceeds at closing.
Step 3: Close on the Relinquished Property
The sale proceeds from the relinquished property are transferred directly to the QI at closing. They are not deposited into your personal or business bank account. Your 45-day and 180-day clocks start from this closing date.
Step 4: Identify Replacement Properties
Within 45 calendar days of closing on the relinquished property, you must submit a written identification to your QI listing your potential replacement properties. For most investors, this means identifying up to three properties using the Three-Property Rule. The identification must be in writing, signed, and delivered to the QI before midnight of the 45th day.
Step 5: Enter a Purchase Agreement
Negotiate and execute a purchase agreement on one of your identified replacement properties. The QI will coordinate with the closing agent to use the exchange funds to fund the purchase.
Step 6: Close on the Replacement Property
Close on the replacement property within 180 days of the close of the relinquished property sale. The QI transfers the exchange funds to the closing. You take title to the replacement property and complete the exchange.
Step 7: File Form 8824
Report the exchange to the IRS using Form 8824 with your tax return for the year in which the exchange occurred. Your CPA or tax attorney will complete this. The form reports the relinquished and replacement properties, the deferred gain, and your new adjusted basis in the replacement property.
Contact Us
Our Location
403 W Lincoln Hwy, Exton, PA 19341